Economic Reporting Review
August 13, 2001
By Dean Baker, co-Director of the Center for Economic and Policy Research
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OUTSTANDING STORIES OF THE WEEK
"Mexico's Open Southern Border Lures Migrants Headed to U.S.," by
Ginger Thompson in the New York Times, August 5, 2001, Section 1,
page 1.
This article examines the flow of immigrant workers from Central
and South America, through Mexico, in search of jobs in the
United States.
"A Stand for Scientific Independence," by Susan Okie in the
Washington Post, August 5, 2001, page A1.
"Missing Data On Celebrex," by Susan Okie in the Washington Post,
August 5, 2001, page A11.
These articles discuss the extent which the pharmaceutical
industry's funding of medical research has raised questions about
its credibility. The first article reports on plans by several
major medical journals to refuse to publish findings from
industry-sponsored research, if the researchers do not have full
control over dissemination of their results.
"Foreign Firms' Layoffs Hit Home for U.S. Workers," by Steven
Pearlstein in the Washington Post, August 6, 2001, page A1.
This article reports on the tendency of foreign controlled firms
to concentrate their layoffs in their U.S. operations. The
article points out that it is much easier to lay people off in
the United States than in Europe, so many multi-nationals,
including U.S.-controlled firms, prefer to lay off workers in the
United States.
THE BUSH ENERGY PLAN
"Labor Pushes Some Democrats to Vote for Bush Energy Plan," by
Sarah Schafer in the Washington Post, August 5, 2001, page A8.
This article discusses the efforts of several labor unions and
the AFL-CIO in support of President Bush's energy plan. The
article includes a reference to a study that found that oil
drilling in the Arctic National Wildlife Refuge could create
700,000 jobs. The article should have also mentioned that this
study was financed by the oil industry, and that many of the
assumptions that drive this finding -- for example, that OPEC
will allow the price of oil to fall without reducing its output -
- are not plausible (see ERR 8-3-01).
ARGENTINA
"IMF Plan Loans for Brazil, Argentina," by Paul Blustein in the
Washington Post, August 4, 2001, page A1.
"IMF Ready for Brazil and Argentina Rescues," by Joseph Kahn in
the New York Times, August 4, 2001, page A4.
These articles report on the IMF's decision to make money
available to Argentina to repay loans to its creditors. At one
point, the Post article asserts that "an economic implosion in
Argentina or Brazil would undermine Washington's case for the
free-market policies that both countries have followed." The fact
that both nations are apparently in desperate need of IMF
bailouts (Argentina's second for the year), would already seem to
undermine Washington's case for the "free-market" policies that
these nations have pursued. Successful policies don't force
nations to run for assistance to international lending
institutions.
The Post article later comments that the Bush administration's
support for the additional funds for Brazil shows that it is
"prepared to support bailouts for countries ... provided their
governments are embracing sound economic policies." It is not
clear what this article means by "sound economic policies."
Usually the soundness of an economic policy can be assessed by
the extent to which it leads to economic growth and improves the
well-being of the population. Argentina's policies have produced
three years of recession, double-digit unemployment, and led it
to repeatedly seek enormous loans from international financial
institutions.
The Times article attributes Argentina's problems partially to
its failure to fully eliminate its budget deficit. While this has
been a demand of the IMF, the basis for the Times' assessment is
unclear. Economists generally consider it normal and desirable
that nations run modest budget deficits, comparable in size to
Argentina's deficit at present, in a recession. The budget will
naturally move towards a deficit in a downturn, since tax
collections fall along with the economy, and spending on various
forms of public assistance inevitably increases. The deficit
spending is a benefit for the economy, since it helps to sustain
demand at a time when the economy is suffering from insufficient
demand. The Times article does not explain why it considers
modest government deficits in a recession to be bad economic
policy.
Neither article notes the most obvious source of Argentina's
problems - the fact that it has tied its currency to an over-
valued dollar. Argentina tied its currency to the dollar in the
early 1990s. When the dollar rose in the late 1990s, the
Argentinean peso rose with it, making its goods uncompetitive in
international markets. Instead of supporting Argentina in the
decision to de-link its currency from the dollar, the IMF (with
the apparent support of the Bush administration) is prepared to
extend large amounts of loans to support an over-valued currency.
This is the exact same strategy which the IMF pursued in Russia
in 1998 and Brazil in 1999. In both cases the IMF's strategy
failed. Both nations eventually devalued their currency, which
paved the path for renewed growth.
"Argentina Doubts Market Wisdom," by Anthony Faoila in the
Washington Post, August 6, 2001, page A1.
This useful article examines the factors that led up to
Argentina's current economic crisis and the impact that it is
having on the population's support for the sort of liberalization
polices advocated by the United States and the IMF.
At several points, the article presents issues in ways that are
sympathetic to the liberalization policies, even when this
position is not supported by the evidence. For example, the
article asserts that "the current troubles stem in part from the
faulty implementation of free market policies." Economists who
design policies for governments must be cognizant of the
institutional structures in place in the country where the
policies are being implemented. The fact that privatization in
Argentina would be accompanied by corruption, as it has been in
most other developing nations, was an entirely predictable
outcome. It would be more correct to say that liberalization
policies that were designed without taking corruption into
account were faulty.
The article notes many of the ways in which privatization lead to
a massive theft of wealth from the Argentinean people. It would
have been appropriate to point out that the U.S. government and
the IMF effectively supported this theft by continuing to extend
loans and support to the Argentinean government throughout this
process. In other circumstances the IMF and World Bank have been
quite willing to withhold loans in order to force governments to
change their policies. For example, the World Bank insisted that
Mozambique end its subsidies to its cashew processing industry in
order to get support. Apparently, the IMF did not feel that the
corruption in Argentina's privatization program warranted similar
sanctions.
The article also repeats, without evidence, assertions that the
devaluation of Argentina's currency "would plunge the country and
perhaps the region into a deeper crisis." Much of Argentina's
current problems stem from its over-valued currency. The IMF and
U.S. officials made the exact same sort of dire warnings before
the devaluation of the Russian currency in 1998 and the Brazilian
currency in 1999. In both cases, the de-valuations did not lead
to the predicted crises. In fact, both economies began growing
again shortly after the devaluation took place. Given this
history, these sorts of assertions about the dangers of currency
de-valuations should not be printed without presenting
alternative perspectives.
JULY EMPLOYMENT DATA
"Jobless Rate May Signal Economy Is Leveling Out," by John M.
Berry in the Washington Post, August 4, 2001, page A1.
This article reports on the Labor Department's release of data on
the employment situation in July. At one point, it presents the
increase of 447,000 in the number of employed people reported in
the household survey as evidence that the economy may be
improving. In fact, the month-to-month changes in employment
reported in the household survey are hugely erratic and primarily
reflect random fluctuations. For example, the household survey
reported that employment dropped by 991,000 in May 2000, a time
when the economy was growing at a 5.7 percent annual rate.
Because of these erratic fluctuations, economists generally
ignore the month-to-month changes in employment reported in the
household survey and instead focus on the changes in jobs
reported in the survey of establishments.
PRODUCTIVITY GROWTH
"Productivity Takes Surprise Jump," by Paul Blustein in the
Washington Post, August 8, 2001, page A1.
This article reports on the release of productivity data for the
second quarter of 2001 and revised data for the years 1997 to
2000. It asserts that this data "provided powerful ammunition for
those who believe the economy has entered a new era in which
technology and a more flexible labor are making American
companies more productive than before."
The report revised down the reported level of annual productivity
growth for the period from the fourth quarter of 1997 to the
fourth quarter of 2000 by an average of 0.5 percentage points.
The data for the second quarter of 2001 was a relatively strong
2.5 percent, but this growth was almost entirely attributable to
an extraordinary 2.4 percent annual rate of decline reported for
hours worked. Quarterly productivity numbers are quite erratic,
especially near an economic downturn. For example, productivity
was reported as growing at a 4.2 percent annual rate as the
economy was entering a recession in the third quarter of 1981.
Productivity reportedly grew at 3.8 percent rate in the second
quarter of 1982, in the middle of the recession. And, in the
first quarter of 1990, just prior to the last recession, it
reportedly grew at a 2.3 percent rate (originally reported as 2.4
percent).
While this article takes the quarterly productivity number as
providing evidence of the continued strength of productivity
growth, given the erratic movements in the data, it would have
been appropriate to take growth over a longer time frame. For
example, over the last year productivity has risen by 1.6
percent. Much of this growth has been attributable to an
extraordinary increase in the share of output that goes to
replace worn out equipment. Income -- wages and profits -- must
be paid out of net output, since no one can eat worn out
equipment. A net measure of productivity would show an increase
of approximately 0.8 percent over the last year, well below the
1.4 percent pace of the years of the productivity slowdown (1973-
1995).
THE BUDGET
"Senate Approves Farm Subsidy Bill President Backed," by Philip
Shenon in the New York Times, August 4, 2001, page A1.
This article reports on the Senate's approval of a farm subsidy
package that contained less money than many Democrats wanted. At
one point the article comments on the expectation that new
projections will show much lower surpluses as a result of the tax
cuts and slower economic growth. It warns that this could lead to
"raids on the Social Security and Medicare trust funds."
In fact, there is no way that a lower surplus will lead to
"raids" on the Social Security and Medicare trust funds, since
these funds are not affected at all by the decision of Congress
to spend the money it borrows from these programs. Just as with
any other creditor of the federal government, the Social Security
and Medicare trust funds will hold the exact same number of
bonds, and will be entitled to the exact same amount of money in
interest and principal, regardless of whether or not the
government spends the money it borrows. Many politicians have
chosen to refer to spending the money from these funds as
"raiding" them, but this is simply for political reasons.
BRAZIL
"Brazilians Uneasy Despite Help by IMF," by Larry Rohter in the
New York Times, August 6, 2001, page A7.
This article discusses the economic situation in Brazil. At one
point it asserts that large inflows of foreign investment "helped
Brazil reduce its current account deficit." Investment flows do
not appear in the current account of the balance of payments;
they are entered in the capital account. In the absence of
central bank intervention, the capital account and current
account sum to zero, which means that a larger surplus on the
capital account, due to foreign investment flows, leads to a
larger deficit on the current account.
IMMIGRATION AND SOCIAL SECURITY
"Census Data Show A Sharp Increase in Living Standard," by Eric
Schmitt in the New York Times, August 6, 2001, page A1.
This article reports on some of the data from the 2000 census. It
is worth noting that the census data implies that the United
States had net immigration of approximately 1,330,000 per year in
the 1990s. This is approximately 50 percent more than the 900,000
annual rate of immigration that the Social Security trustees
assume the United States will experience. This gap is difference
is striking, because the trustees' projections cover the period
when the baby boomers are retiring and the United States should
be experiencing a serious labor shortage. If the United States
has the same rate of immigration when the baby boomers begin to
retire as it did in the last ten years, then the shortfall in the
Social Security program will be significantly less than is
currently projected.
GERMANY
"Sluggish Germany Begins to Drag Down Rest of Europe," by Edmund
L. Andrews in the New York Times, August 8, 2001, page W1.
This article reports on the slowing of economic growth in
Germany. At one point it notes that inflation began to rise in
Germany when its growth rate reached 3.0 percent last year. It
reports that this led consumers to restrain consumption and
therefore slowed growth.
The article neglects to mention the response of the European
Central Bank to the rise of inflation, which has differed sharply
from the response of the Federal Reserve Board. Inflation
actually increased by more in the United States than in Germany
(from 1.6 percent in 1998 to approximately 3.5 percent
currently), although the main reason was the same, the rise in
world energy prices. While the Federal Reserve Board has been
willing to sharply reduce interest rates to counteract economic
weakness, in spite of this inflation, the European Central Bank
has been unwilling to do so. The European Central Bank and the
individual national banks that preceded its creation, have
consistently been much less tolerant of inflation than the
Federal Reserve Board has been under Alan Greenspan. This is the
most obvious explanation for slow growth in Germany and the rest
of Europe.
TRADE STRATEGIES
"Walking the Trade Tightrope Confidently," by Richard W.
Stevenson in the New York Times, August 5, 2001, Section 3, page
4.
This article assesses the strategy of Robert B. Zoelleck, the
U.S. trade representative, as he attempts to push the Bush
administration's trade agenda. At one point it refers to the
agendas of various parties at the next WTO meetings in Qatar. It
comments that "developing nations are concerned about being
forced to make good on previous market-opening commitments that
they have not carried out."
It is not apparent what this passage is referring to. The one
issue that the developing nations have explicitly asked to be
reconsidered is the TRIPS agreement from the 1994 Uruguay round,
which requires that developing nations adopt U.S. style patent
and copyright protection. Developing nations have become
concerned about the impact of this agreement, since it could lead
to the transfer of hundreds of billions of dollars, in the form
of royalties and licensing fees, from poor countries to wealthy
countries. It could also raise the price of pharmaceuticals, such
as AIDS drugs, by several hundred, or even several thousand,
percent, making them unaffordable to the vast majority of people
in developing nations. If the article was referring to the TRIPS
agreement, then it is wrong to characterize it as "market-
opening," since it is actually a protectionist measure that
severely restricts the exchange of goods in the market.
It is striking that the TRIPS agreement was not explicitly
mentioned as one of the topics to be discussed at Qatar, given
the concerns of developing nations. While both the Times and Post
have run several articles discussing the talks in Qatar,
including the agenda of developing nations at these talks, none
of these articles have explicitly discussed their demand that the
TRIPS agreement be reconsidered (see ERR 8-3-01).
THE SOCIAL WELFARE STATE
"Who Do You Trust?" by Robin Toner in the New York Times, August
5, 2001, Section 4, page 1.
This article argues that the debate over the whether the public
sector or private sector is better suited to provide Social
Security and Medicare is "driven by almost religious
convictions." While many participants in the debate may view this
as a quasi-religious matter, it is plausible that the bulk of the
public could be swayed by evidence of the relative effectiveness
of the public sector and private sector.
For example, data from the World Bank show that the
administrative expenses of the public Social Security system in
the United States are less than one tenth as large as the
administrative costs of privatized systems like the ones in the
United Kingdom or Chile. Similarly, data from the OECD show that
the United States pays more than twice as much per person for its
health care than the average for the publicly supported systems
in other industrialized countries, but that its population ranks
near the bottom in health care measures such as life expectancy.
It is possible that the bulk of the population would care more
about this sort of evidence on the relative effectiveness of
public and private systems in determining its preferences, rather
than any adherence to quasi-religious convictions on the topic,
if the most relevant facts were more readily available.
Unfortunately, the facts which could provide a basis for choosing
between systems are rarely reported.
MEXICO AND PROTECTIONIST POLICIES
"The Route to Real Safety May Be the Open Road," by Anthony
DePalma in the New York Times, August 5, 2001, Section 4, page 5.
This article discusses the extent of the economic integration
between the United States and Mexico in the context of the
dispute over Mexican trucks entering the U.S. At one point the
article asserts that: "in the old days, when bashing the United
States was a stock in trade for many Latin American populists,
Mexico built walls around its economy to keep from being
smothered by the United States. But those walls didn't feed their
people." The article goes on to note that Mexico has largely
removed its barriers, quoting a political science professor
saying that, "since Nafta came into effect in 1994, exports from
Mexico have grown faster than from any other nation."
According to data from the World Bank, per capita GDP in Mexico
grew at an average annual rate of 3.9 percent in the period from
1960-1980, when the country supposedly "built walls around its
economy." By contrast, in the last two decades, the World Bank's
data show that per capita GDP has increased at an annual rate of
just 0.5 percent.